Crazy Data, Claims, and Cowbells

Episode Summary

Executive Summary: The podcast examines a mixed U.S. and European macro backdrop: U.S. GDP surprised modestly to the upside but underlying private demand softened, labor-market indicators remain contradictory, and housing is still weak though possibly nearing bottom. The panel debated whether the economy is heading toward a soft landing, a “slow session,” or recession, while noting Europe’s energy shock has eased materially and the Eurozone may avoid a severe downturn.

Main Topics: U.S. Q4 GDP and inflation data (Priority: 5/5): The team broke down the 2.9% annualized Q4 GDP print, emphasizing that inventories, net exports, and government spending boosted headline growth while private domestic demand remained weak. They also noted the December PCE read showed continued disinflation, especially in core measures. Soft landing vs. recession vs. 'slow session' (Priority: 5/5): A central debate focused on whether slow growth is exactly what the Federal Reserve needs to cool inflation without triggering a hard recession. Chris remained more pessimistic, while Mark argued that below-potential growth is necessary and potentially desirable. Labor market mixed signals (Priority: 5/5): The panel discussed low initial claims, rising continuing claims, subdued layoffs, slowing hiring, and conflicting survey data. They debated whether the labor market is cooling through reduced hiring rather than layoffs, which would be more consistent with a soft landing. Housing market stabilization (Priority: 4/5): New home sales improved modestly, and the Moody's repeat sales index turned slightly positive in December. The group argued housing remains in recession, but prices may be stabilizing as affordability remains strained and life events will eventually force more transactions. Europe's energy shock easing (Priority: 4/5): Gaurav reported a much improved European outlook driven by collapsing gas prices, strong storage levels, warm weather, and LNG substitution. The UK still looks weaker than the Eurozone, but the continent may avoid the severe recession feared in late 2022. Recession probabilities and forecasting uncertainty (Priority: 3/5): Each speaker updated recession odds, reflecting a highly uncertain outlook. The discussion stressed that current data can be consistent with either a soft landing or an imminent recession, making interpretation especially difficult.

Key Arguments: Headline GDP growth overstated underlying strength because inventories, government spending, and trade contributed heavily while private domestic demand was only 0.2%. A sub-2% growth trend may actually be desirable if it helps reduce inflation and bring labor-market tightness and wage growth down without a severe recession. Initial unemployment claims remain too low to be recessionary, suggesting layoffs are not yet widespread enough to show up in the data. The labor market may be adjusting more through slower hiring than through higher layoffs, which is more favorable for confidence and soft-landing odds. Business Employment Dynamics and related data suggest payroll employment may be revised lower, implying the labor market was weaker in mid-2022 than headline figures indicated. Housing is still deeply impaired by mortgage-rate affordability constraints, but recent flat house-price readings and rising new home sales suggest the worst may be slowing. Europe's outlook improved sharply because energy prices plunged, gas storage is ample, and winter has been milder than feared; this reduces near-term recession risk. China’s reopening could eventually lift commodity prices again, which remains a risk for inflation and Europe’s energy-sensitive economy.

Data Points: U.S. Q4 2022 GDP growth: 2.9% annualized - Preliminary fourth-quarter GDP release; headline growth beat concerns but was not broad-based. U.S. GDP growth, full-year average 2022: 2.1% - Annual average growth for calendar year 2022. U.S. GDP growth, Q4 2021 to Q4 2022: 1.0% - Mark used this to compare growth against estimated potential. Potential GDP growth: ~2.0% - Estimated rate consistent with stable unemployment. Consumer spending growth in Q4: 2.1% annualized - Personal consumption contributed positively to GDP growth. Change in inventories contribution to GDP: ~1.5 percentage points - Inventories were a major driver of headline Q4 GDP growth. Core PCE inflation, December: 0.3% m/m - Inflation measure excluding food and energy accelerated slightly from November. PCE inflation, December: 0.1% m/m - Headline PCE increase matched November's pace. Real consumer spending, December: -0.1% m/m - Mark noted real spending fell in December after weak November and flat October readings. Real disposable income: Positive over the past 3-6 months - Purchasing power improved as inflation eased and wage growth remained solid. Personal saving rate, December: Rose to roughly 3-4% - Saving rate appears to have stopped falling after a year of drawdown. Initial unemployment claims: 186,000 - Weekly claims remained very low and inconsistent with recession. Continuing unemployment claims: Rose - Suggested longer job-search duration for those already laid off. Conference Board Leading Economic Index: -1.0% - Still weak and consistent with prior recession patterns. Chicago Fed National Activity Index: -0.49 - Negative reading signaled subpar activity and recession risk. Eurozone composite PMI: 50.22 - Moved back above the 50 expansion/contraction threshold; improvement versus second-half 2022. Business Employment Dynamics net employment change, Q2 2022: -287,000 - Marissa’s statistic; suggested employment may be weaker than monthly payroll data imply. New home sales monthly change: +2.3% - Chris’s statistic; marked the third straight monthly gain. New home sales year-over-year change: -27% - Housing demand remained far below prior-year levels. Moody's repeat sales house price index, December: +0.1% m/m - Indicated house-price stabilization after earlier declines. European gas prices: ~55 euros/MWh - Below pre-invasion levels and far below the summer 2022 peak. European gas price peak: ~350 euros/MWh - Referenced as the July 2022 spike when Nord Stream 1 was shut down. Eurozone recession probability: ~65% - Gaurav said odds fell about 10 percentage points from two months earlier but still favored recession. U.S. recession probability: ~55% - Mark placed the U.S. slightly below the Eurozone but still above 50%. Chris's U.S. recession probability: ~66% - He remained the most bearish among the panel. Marissa's U.S. recession probability: 50% - She held steady despite weak recent data.

Pivotal Quotes: "“If it’s the trend and the speed, right? Things are coming in here pretty fast in my opinion.”" — Chris Tarides: He argued the economy is slowing quickly enough to raise recession concerns. "“I think as I would say, right down the strike zone, right? It’s weak, but that’s weak is what we want.”" — Mark Zandi: Mark defended weak growth as necessary to cool inflation without a deep downturn. "“I’ve got to try and say that. No recession. We’re not going backwards... So slow session.”" — Gaurav Ganguly: He described the UK/European outlook as muted growth rather than a full recession.

Implications: Listeners should expect volatile, mixed macro data in 2023: cooling inflation and weaker growth are helping the Fed/ECB, but the U.S. still faces recession risk, while Europe looks better than feared thanks to cheaper energy and stronger gas storage.